What the contract says, goes

Words:
Douglas Wass

Common sense isn’t enough to overturn a straightforward bad bargain

Payment terms continue to be fertile ground for debate. A recent Court of Appeal case, in which I acted for the successful developer, Grove Developments Ltd (Grove), has provided a reminder on the care needed when drafting, advising on and administering the payment provisions in building contracts.

Grove had engaged Balfour Beatty Regional Construction Ltd (Balfour) to carry out the design and construction of a hotel and serviced apartments in south east ­London. Grove and Balfour changed the payment provisions in the JCT Design and Build 2011 edition to include a payment schedule which set out details of 23 monthly interim payments up to July 2015 (the anticipated completion date). The project did not, in fact, achieve practical completion until July 2016. 

After July 2015 the parties tried but failed to agree an extended payment schedule, though Balfour continued to apply for payment. In November 2015, it claimed £23 million on the basis that Grove had failed to serve certain payment notices under the building contract on time during August 2015. 

Grove, therefore, sought a declaration from the Technology & Construction Court (TCC) that Balfour was not entitled to further interim payments after July 2015 as the schedule did not provide for payments after that date. The judge agreed. Balfour was not entitled to further payments until the final account – some three years away at that stage. Unsurprisingly, Balfour appealed to the Court of Appeal. It argued that, first, the payment schedule only included dates for payment up until July 2015 because that was the anticipated practical completion date, and therefore should be interpreted as requiring monthly payments to be made until practical completion rather than July 2015. Secondly, the payment schedule breached the requirement of the Construction Act that a party to a construction contract be entitled to be paid by ‘instalments, stage payments or other periodic payments’ if it did not allow Balfour to claim interim payments for work carried out after July 2015.

The courts will be extremely reluctant to save parties from a bad bargain by applying their own view of commercial common sense

Although divided, the Court of Appeal dismissed those arguments. While this may seem harsh, the majority of the judges found that the payment schedule was clear and unambiguous. Given this, the court was not able to ‘… rescue one party from the consequences of what …. [it] had clearly agreed…’ in what one of the judges called a ‘classic case of one party making a bad bargain’. They further held that the Construction Act was not breached because it provides that the ‘parties are free to agree the amounts of the [interim] payments and the intervals at which, or the circumstances in which, they become due.’ So it was open to the parties to agree no interim payments would made after July 2015. 

This decision shows that, where a contract is unambiguous, the courts will be extremely reluctant to save parties from a bad bargain by applying their own view of commercial common sense, and that the Construction Act imposes few limits on the interim payment regime which can be agreed by parties. 

However, employers should not see this decision as encouragement to seek to impose harsh interim payment regimes on contractors because the court said any interim payment regime should be agreed in ‘good faith’. A payment regime consisting of one interim payment of an insignificant amount probably would not comply with the Construction Act as it would constitute a ‘cynical device’ designed to undermine the aims of the act. 

A great deal of care should be taken when negotiating payment provisions to ensure the parties have common intentions which are properly reflected in the wording. Expensive and time consuming litigation can result from any lack of clarity. 

Doug Wass is a partner at Macfarlanes LLP


IN PLAIN ENGLISH

Contract sum

The contract sum is the amount of money the contractor agrees to carry out the works for. In the JCT forms of contract, the figure is set out in the articles. It is generally VAT exclusive. It is not fixed and so the employer may pay more or less than the figure originally agreed with the contractor. Reasons why the contract sum may change include variations or changes instructed by an employer; contractor claims for loss and expense; fluctuations and the instruction of provisional sums. The Construction Act sets out minimum requirements with which employers and contractors have to comply when agreeing how the contract sum will be paid.

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